The US Dollar to Canadian Dollar rate today (17/07/17): +0.19pct at 1.26666

Bank of Canada hikes rates to join Fed in tightening

HSBC see USD/CAD downtrend continuing

Oil price shows signs of life

Tariff threat to Canada has waned recently

For what seems like forever, the Federal Reserve has been essentially the only DM Central Bank in a tightening cycle. Having to go it alone for a goodly period of time has had a couple of effects, the first effect has been to create elevated expectations in the US Dollar (currency:USD) as the FOMC has faced the full might of global scrutiny at a time when inflation has underperformed most global forecasts for years.

With US rates clearly under-performing initial expectations, the US dollar (currency:USD) has still enjoyed inflows as other banks have been unable or reluctant to tighten policy.

This all changed last week as the Bank of Canada stepped out into the void alongside their US counterparts by raising rates. The move was well documented by Governor Poloz and the CAD strengthened right up to the meeting and beyond as the hike was seen as "hawkish", with some indication from the BoC that they intend to keep pursuing tighter policy and the hike is not intended to be a one off. USD/CAD broke down to the 1.26 handle on Friday and there is little on the chart in the way of resistance that looks like stopping it. HSBC believes that far from halting its decline, the currency pair is set to move lower,

"Clearly the peak in USD/CAD has long since passed. We believe the retracement lower is justified and largely complete and look for USD/CAD to finish the year at 1.25".

One of the major factors in determining the price of the Canadian Dollar (currency:CAD) is the Oil Price. A rally last week on the back of some above forecast draws in Crude supplies has breathed some life into the beleaguered black gold. If this rally was to continue then the Canadian Dollar (currency:CAD) would likely maintain its upward momentum.

Another major threat to the Canadian Dollar (currency:CAD), which materialised earlier in the year, was the threat of protectionism in the US.

A tariff on Canadian softwood exports earlier in the year sparked some serious concerns over Donald Trump's apparent commitment to some of his campaign rhetoric and the CAD fell as a result. These fears have eased somewhat, and Trump's apparent concessions to renegotiating NAFTA is positive news in this regard.

While the stars may have aligned for the CAD it does look a bit oversold and a dip cannot be ruled out.